MADISON, WISCONSIN, UNITED STATES – APRIL 8: US President Joe Biden delivers a speech … [+]
President Joe Biden unveiled a sweeping recent student loan forgiveness plan this week that would provide relief for as much as 30 million borrowers.
“I have said that I will not shy away from using every tool at our disposal to get student loan borrowers the relief they need,” Biden said in an announcement on Monday. “That’s why today we’re announcing new plans that, if implemented, would cancel student debt for millions more.”
The recent loan forgiveness initiative, which differs from Biden’s original student debt relief that was struck down by the Supreme Court, focuses on several categories of borrowers. One of those categories includes borrowers hurt by what Biden called “out-of-control interest rates” — a major problem for many individuals combating student debt.
The recent initiative would waive student loan interest.
Student Loan Forgiveness for Capitalized Interest
It isn’t unusual for borrowers to find yourself owing way more than they originally borrowed, often despite having been in repayment for a few years. Due to the far-reaching impact of this phenomenon, the Biden administration is targeting student loan forgiveness for these borrowers.
There are several reasons for broad interest-related increases in student loan balances. First, interest on unsubsidized federal student loans begins accruing immediately upon disbursement, even while the borrower remains to be in class. Only subsidized state student loans freeze interest in the course of the school enrollment period. Because most federal student loans are unsubsidized, which means many borrowers find yourself owing greater than they originally borrowed immediately after repayment attributable to interest accrued while they were in class.
During periods of nonpayment, interest may proceed to accrue, each on unsubsidized student loans and, in some cases, subsidized student loans. Interest accrues during grace periods, that are typically six-month periods after closing during which no payments are due. Interest can also accrue during deferrals and a few deferrals, that are programs designed to temporarily defer repayment. Borrower advocacy groups have for years accused loan servicers of engaging in so-called “forbearance control practices,” wherein borrowers who tell their servicers they’re having trouble making their payments are placed in a forbearance plan reasonably than a more favorable repayment plan. Deferrals can have a serious impact on interest over time and end in periodic capitalization of interest (where accrued interest is added to the loan principal, leading to interest accruing on interest).
Additionally, borrowers who’ve repaid their student loans under income-driven repayment plans can also see significant balance increases attributable to interest accrual and capitalization. IDR plans base a borrower’s monthly payment on their income and family size, with the choice of student loan forgiveness after 20 or 25 years. However, there is no such thing as a requirement that monthly payments be high enough to cover the interest accrued. As a result, borrowers with IDR plans may experience negative amortization – a growing loan balance whilst they make payments. While borrowers through IDR plans may ultimately receive student loan forgiveness, that forgiveness might be a taxable event. And the next balance attributable to capitalized interest could end in even higher taxes.
The recent Biden student loan forgiveness plan goals to offer relief to borrowers who’ve experienced significant interest charges and capitalization.
How capitalized interest student loan forgiveness will work
Biden’s recent student loan forgiveness plan would eliminate student loan interest “for all borrowers who have accumulated or capitalized interest on their loans since repayment began,” it says recent instructions published by the Ministry of Education.
“All borrowers would be eligible for this debt relief,” which is tied to interest capitalization, the guidance states. However, the quantity of student loan forgiveness is dependent upon the borrower’s circumstances.
“Low- and moderate-income borrowers enrolled in the SAVE plan or other income-driven repayment plans would be eligible to have their entire interest balance canceled since repayment began,” the guidance states. Qualified borrowers would need to have an income of $120,000 or less as a person or married individually, $180,000 or less as head of household, or $240,000 or less if married jointly.
Borrowers who don’t meet these income requirements are still eligible for as much as $20,000 in student loan forgiveness related to capitalization of interest.
Key details about Biden’s recent student loan forgiveness plan
Capitalized interest isn’t the one basis for student loan forgiveness under Biden’s recent debt relief plan. The program also provides 4 additional reasons for canceling a loan, including current eligibility for existing student loan forgiveness plans, a repayment period of greater than 20 or 25 years, participation in “programs of low financial value,” and financial difficulty.
The program isn’t yet available, so borrowers cannot yet apply for student loan forgiveness. The Department of Education is anticipated to release the ultimate regulations next month, and a public comment period will follow. The program might be ready in the autumn. However, there’ll almost definitely be legal challenges that would block implementation.
